CARO 2020: Clause-by-Clause Reporting Checklist for Auditors
- CARO 2020 has 21 reporting clauses — missing even one can attract NFRA scrutiny and damage the audit report's credibility.
- Most audit failures happen on three clauses: loans (Clause 3), fraud reporting (Clause 21), and internal audit adequacy (Clause 15).
- Use this clause-by-clause checklist before signing any statutory audit to ensure complete, accurate CARO compliance.
The Companies Auditor's Report Order 2020 (CARO 2020) applies to most company audits in India from FY 2021-22 onwards. It requires the statutory auditor to give specific, factual answers on 21 clauses — not vague opinions. If your client is a company (with limited exceptions for small private companies meeting certain criteria), your audit report must carry a CARO report. This checklist walks through every clause in plain language, flags what documents you need, and highlights where auditors routinely go wrong. Bookmark this before your next audit season.
Who Needs a CARO 2020 Report?
CARO 2020 applies to all companies except those that satisfy all three of the following exemption conditions simultaneously:
- It is a private limited company.
- Paid-up capital plus reserves do not exceed ₹1 crore as at the balance sheet date.
- Total borrowings from banks or financial institutions do not exceed ₹1 crore at any point during the year, and total revenue (turnover plus other income) does not exceed ₹10 crore.
One-person companies, small companies, and banking/insurance/Section 8 companies are also exempt. If your client does not satisfy all exemption criteria, CARO applies — no exceptions.
The 21 Clauses at a Glance
| Clause No. | Topic | Key Evidence Required |
|---|---|---|
| 3(i) | Fixed Assets / Property, Plant & Equipment | Asset register, physical verification report, title deeds |
| 3(ii) | Inventory | Physical count sheets, management representation |
| 3(iii) | Investments / Loans / Guarantees / Security given | Board resolutions, loan agreements, Register of Loans u/s 186 |
| 3(iv) | Compliance with Sections 185 and 186 | Board minutes, shareholder resolutions, ROC filings |
| 3(v) | Deposits from Public | Deposit receipts, RBI/NCLT orders if applicable |
| 3(vi) | Cost Records | Cost audit applicability check, cost records maintenance |
| 3(vii) | Statutory Dues | TDS/GST/PF/ESI challans, assessment orders, demand notices |
| 3(viii) | Unrecorded Income Surrendered | IT assessment orders, search/survey records |
| 3(ix) | Default on Loans / Borrowings / Debentures | Loan statements, bank confirmations, debenture trust deeds |
| 3(x) | Funds Raised by IPO / FPO / Rights Issue | Prospectus, end-use statements, bank statements |
| 3(xi) | Fraud — by or on the company | Audit observations, management representation, FIR/complaint copies |
| 3(xii) | Nidhi Company compliances | Net owned funds, member ratio, liquid asset ratio |
| 3(xiii) | Related Party Transactions | Form AOC-2, board/shareholder approvals, AS-18/Ind AS 24 disclosures |
| 3(xiv) | Internal Audit System | Internal audit reports, appointment letter |
| 3(xv) | Non-Cash Transactions with Directors | Board resolutions, Section 192 compliance |
| 3(xvi) | RBI Registration (if applicable) | Certificate of Registration as NBFC |
| 3(xvii) | Cash Losses | P&L, last year P&L comparison |
| 3(xviii) | Resignation of Statutory Auditors | ADT-3, board minutes, predecessor auditor file |
| 3(xix) | Going Concern — Financial Ratios | Net worth, current ratio, DSCR, detailed ratio analysis |
| 3(xx) | CSR Obligation compliance | CSR committee minutes, Form CSR-2, unspent CSR account |
| 3(xxi) | Qualifications in Group Company Auditor Reports | Subsidiary/associate/JV audit reports |
Three Clauses That Catch Auditors Off-Guard
Clause 3(iii) — Loans, Guarantees, Investments
This clause requires you to report whether loans given are prejudicial to the company's interest and whether repayment is regular. Collect the original loan agreement, check the interest rate against the market rate, and verify each EMI or repayment date against bank statements. If the borrower has defaulted even once, say so — clearly.
Worked example: ABC Pvt Ltd lent ₹50,00,000 to its promoter's partnership firm at 0% interest in April 2026. The arm's-length rate for similar lending is roughly 12% per annum. The lost interest for the year is ₹50,00,000 × 12% = ₹6,00,000. This is "prejudicial to the company's interest" and must be reported under Clause 3(iii) with the amount and nature stated explicitly — not buried in a footnote.
Clause 3(vii) — Statutory Dues
List every undisputed statutory due outstanding for more than six months from the date it became payable. This includes Income Tax, GST, TDS, PF, ESI, customs duty, and any other applicable levy. Then separately list disputed dues with the forum where the dispute is pending. Many auditors report the total figure but omit the aging — NFRA has flagged this repeatedly.
Clause 3(xix) — Going Concern Ratios
CARO 2020 specifically asks about financial ratios used to assess going concern. If net worth is eroded or current ratio is below 1, document your analysis in the working papers. If there is substantial doubt about going concern, the CARO report must say so, and the main audit report must carry a going concern emphasis of matter or qualification as appropriate.
Clause 3(xx) — CSR: A New Trap
Companies with net profit above the threshold under Section 135 must spend 2% of average net profits on CSR. Under CARO 2020, the auditor must verify whether the required amount was computed correctly, whether it was actually spent or deposited in an unspent CSR account within the prescribed time, and whether Form CSR-2 was filed. Failure to deposit unspent amounts attracts penalties under Section 135(7). Check the unspent CSR bank account statement — it must be a separate, designated account.
Clause 3(xxi) — The Group Audit Problem
If any subsidiary, associate, or joint venture auditor has given a qualified, adverse, or disclaimer of opinion, you must report that in your CARO report too. Auditors of holding companies frequently sign off without even reading the component auditor reports. Request all component audit reports before finalising your own report. If a qualification exists and you have not mentioned it under Clause 3(xxi), you are in direct violation — regardless of materiality.
Common Mistakes Auditors Make on CARO 2020
- Copy-pasting last year's CARO report without checking whether facts have changed — especially for Clauses 3(iii), 3(vii), and 3(ix). Loan balances, dues, and defaults change every year.
- Reporting "not applicable" without basis — for example, saying cost records are not applicable without actually checking whether the company falls under the Cost Records and Audit Rules 2014 based on its industry and turnover.
- Ignoring Clause 3(xviii) — if the previous auditor resigned, failing to obtain and review the reasons stated in ADT-3. NFRA expects you to consider whether the resignation was linked to any disagreement or reportable matter.
- Treating Clause 3(xi) as a management issue only — fraud reporting is an auditor's independent obligation. If audit procedures reveal indicators of fraud, report it even if management denies it.
- Missing the internal audit requirement check for Clause 3(xiv) — companies above specified turnover and borrowing thresholds must mandatorily appoint an internal auditor. Many auditors simply ask management and accept a verbal confirmation instead of verifying the appointment letter and actual internal audit reports.
Practical Checklist Before Signing
- Obtain signed management representation covering all 21 CARO clauses.
- Reconcile fixed asset register to physical verification report — verify that physical verification was done at reasonable intervals per Clause 3(i).
- Pull the 26AS / AIS for TDS compliance and cross-check with GST returns for statutory dues aging.
- Review all loan agreements and board resolutions for Clauses 3(iii) and 3(iv).
- Download and read every subsidiary/JV auditor report for Clause 3(xxi).
- Compute financial ratios — current ratio, debt-equity, DSCR — and document going concern assessment.
- Check CSR computation, unspent CSR account, and CSR-2 filing status.
If your firm handles multiple company audits, a standardised CARO working paper template saves time and reduces omissions. KyaTax's Tax Audit Services team uses a digitised checklist that maps each clause to the supporting document — ask us how we can help you build one for your practice.
Do it yourself in minutes — free to try, no login needed.
Open Tax Audit Services →Frequently asked questions
Is CARO 2020 applicable to all private limited companies?
No. A private limited company is exempt if it satisfies all three conditions simultaneously: paid-up capital plus reserves do not exceed ₹1 crore, total borrowings from banks or financial institutions do not exceed ₹1 crore at any point during the year, and total revenue does not exceed ₹10 crore. If even one condition is not met, CARO 2020 applies.
What happens if the auditor gives a wrong or incomplete CARO report?
NFRA (National Financial Reporting Authority) can take disciplinary action against the auditor, including fines and debarment. The Companies Act also provides for penalties on auditors who knowingly sign misleading reports. Even an incomplete CARO — such as missing a clause or writing "not applicable" without basis — can trigger regulatory scrutiny.
Does CARO 2020 require the auditor to report all frauds or only large ones?
Clause 3(xi) requires reporting of any fraud by the company or any fraud on the company noticed during the audit, regardless of amount. There is no minimum threshold. However, fraud by officers or employees below a specified amount must be reported to management, while fraud above that amount must be reported to the Central Government in Form ADT-4.
Is CARO 2020 applicable for FY 2026-27 audits?
Yes. CARO 2020 has been applicable since FY 2021-22 and continues to apply to all eligible company audits for FY 2026-27 unless the MCA issues a superseding order, which has not happened as of the date of this article.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
Related: All free tools · More guides · Virtual CFO